Officials in Chicago, Illinois, have been breaking federal law by confiscating cars from motorists who have filed for bankruptcy protection. That was the ruling Wednesday by the Seventh Circuit US Court of Appeals, which upheld the same finding made by a federal bankruptcy judge last year (view 2018 ruling).

The Windy City has been holding cars hostage as a means of coercing payment of as few as two unpaid parking tickets or photo enforcement citations. The policy went too far by grabbing cars from people who did not have the funds to pay the tickets and were forced to file for Chapter 13 bankruptcy. Under federal law, the bankruptcy filing imposes an automatic stay on creditors, which requires return of the impounded vehicle. The city made a change to the city code in 2016 adding a "possessory lien" to impounded vehicles as a way of evading the bankruptcy code. The three-judge appellate panel said the municipal code does not override federal law.

"We conclude, as each bankruptcy court did, that the city violated the automatic stay pursuant to Section 362(a)(3) by retaining possession of the debtors' vehicles after they declared bankruptcy," Judge Joel Martin Flaum wrote for the court. "The city was required to return debtors' vehicles and seek protection within the framework of the Bankruptcy Code rather than through the nonbankruptcy remedy of possession."

Last summer, the lower court judge imposed a $100 per day fine against Chicago for every improperly impounded car that it refused to return. This had the desired effect, as the 2015 Kia Soul was returned to Robbin Fulton, the 1997 Buick Park Avenue to Timothy Shannon, the 2007 Lincoln MKZ to George Peake and the 1975 Buick Regal belonging to Jason Scott Howard. Nonetheless, the city appealed, asking the Seventh Circuit to rein in the bankruptcy judges.

"We decline the city's request," Judge Flaum wrote. "The city's arguments ignore the purpose of bankruptcy -- to allow the debtor to regain his financial foothold and repay his creditors."

The three-judge panel pointed out that a majority of federal appellate courts have come to the same conclusion, with the Tenth Circuit being the only holdout that would agree with Chicago.

"At bottom, the city wants to maintain possession of the vehicles not because it wants the vehicles but to put pressure on the debtors to pay their tickets," Judge Flaum explained. "That is precisely what the stay is intended to prevent... We are persuaded that, on balance, this is an exercise of revenue collection more so than police power. As debtors observe, a not insignificant portion of the city's annual operating fund comes from its collection of parking and traffic tickets."

Instead of holding the car, the court suggested the city file its claim with the Illinois secretary of state to ensure its claim is preserved.

A copy of Wednesday's ruling is available in a 300k PDF file at the source link below.